Gold price (XAU/USD) continues to rise during the early Asian trading session on Friday. The rise in the precious metal is fueled by lower US Treasury yields. At the time of writing, gold is trading near $1,982, up 0.06% on the day.
Meanwhile, the US Dollar Index (DXY), an index of the value of the US dollar measured against a basket of six global currencies, is consolidating around 104.40. US Treasury yields fell, with 10-year yields at 4.44%.
Markets priced interest rates at the end of the tightening cycle and expect a rate cut in mid-2024, putting some selling pressure on the US dollar (USD) and boosting gold prices. Weekly initial claims in the United States rose by 231,000, the highest level in nearly three months. It rose 11 to 231,000, the highest level in nearly three months. While ongoing jobless claims rose to their highest level since 2022, as Up 1.865 million from 1.883 million in the previous reading. U.S. industrial production fell 0.6% month-on-month in October from a 0.1% rise in the previous month, below market expectations.
U.S. President Joe Biden and Chinese President Xi Jinping agreed on Wednesday to restore military interactions and cooperate in efforts to curb fentanyl production. However, renewed tension between the United States and China, the world’s largest economy, could lift the yellow metal even more.
Going forward, the building permit and housing commencement in the United States will be issued on Friday. The number of homes under construction is expected to fall from 1.358 million to 1.35 million, while building permits are expected to fall from 1.471 million to 1.45 million. Traders will also benefit from the numbers and find an opportunity to trade around the price of gold.
The impact of US economic data on interest rates and gold
The most active contract based on gold futures (December 2023) was set at $1984.10. However, the December contract will expire soon with the progress of the first notice day. That’s why we’re focusing on the February 2024 Comex contract which is currently set at $2004.20. Both months of the contract made a profit of just under $20 per ounce.
Today’s most important report confirmed that the US economy is starting to contract. This was the last axis of market sentiment regarding the Federal Reserve’s timeline for starting interest rate cuts. A data-driven Federal Reserve needs supportive data behind its actions. The US weekly jobs claims report did this because it revealed that jobless claims each week increased much more than expected.
The report was followed by Wednesday’s US producer price index report, which saw the biggest drop in three and a half years. Earlier this week, the long-awaited CPI report revealed that inflation appears stable at its current rate at least for now.
The Fed’s doctrine of “rising longer” was revealed when they addressed how high interest rates can last and how long those rates will remain high. However, it does not directly specify the Fed’s timeline for the interest rate cuts that will follow the completion of the current quantitative tightening that many believe is over. Data from the FOMC meeting in September included economic forecasts that represent the individual sentiment of Fed members for the next three years. What was revealed was a general consensus among members not to start the cycle of interest rate cuts until the second or third quarter of next year. While market participants continue to predict that interest rate cuts will take place next year, the timeline for raising this policy has moved from May to early March.
Gold prices rise supported by falling bond yields and expectations of stable interest rates
Gold prices rose on Thursday as U.S. Treasury yields fell, amid expectations that the Federal Reserve has finished its interest rate hike cycle.
Spot gold gained 0.3 percent to $1,965.08 an ounce. U.S. gold futures rose 0.2 percent to $1,967.70. “Gold will maintain its recent strong gains as long as the price stays above the $1930 level. Ole Hansen, head of commodity strategy at Saxo Bank, said: “The outlook for lower interest rates and continued demand from central banks should ensure sufficient support to withstand any short-term strength in the economic data.”
U.S. producer prices fell the most in three-and-a-half years in October, data showed on Wednesday, the latest sign of easing inflation pressures, while retail sales fell for the first time in seven months. Data on Tuesday showed that key consumer prices in the United States were unchanged in October.
Signs of slowing inflation have boosted bets among investors that the Fed has finished raising interest rates. “Santa Fe’s rise in equities may reduce demand for gold from an alternative and safe perspective, but overall we remain patiently optimistic,” Hansen said.
Although gold is known to be a hedge against inflation, low interest rates enhance the attractiveness of non-yielding assets. The yellow metal was helped by the stability of the dollar index against a basket of currencies, not far from a more than two-month low of 103.98, while the benchmark 10-year US Treasury yields fell to 4.50%.
Gold bullish: a two-sided safe haven amid geopolitical tensions and central bank policies
The yellow metal has received support on several fronts recently. Gold’s safe-haven status was clearly demonstrated on October 7. The day before the attack, gold was priced at $1,833.01. Bullion has risen 8.2% since then.
Higher interest rates make safe-haven assets less attractive because they do not yield any interest. Low interest rates have the opposite effect, making haven assets more attractive in an economic climate characterized by very low interest rates.
On a more moderate front, investors are increasingly supporting gold as the world’s major central banks look to approach the end of the rapid cycle of interest rate hikes as inflation boils.
Gold, which yields no return, tends to struggle amid high and rising interest rates. The price of gold – and gold stocks in the ASX 200 index – also enjoys favorable winds amid “strong” buying by the central bank.
Gold Demand Trends for the Third Quarter issued by the World Gold Council indicated that “central bank buying maintains a historic pace.” This helped lift quarterly demand to 1,147 tonnes (excluding OTC). This is 8% higher than the five-year average. Regarding what awaits the price of gold, Louise Street, senior market analyst at the World Gold Council, said: “Looking ahead, with geopolitical tensions escalating and strong purchases by central banks expected to continue, demand for gold may surprise to the upside.”
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